Northgate Plc is a provider of flexible fleet rental, mainly commercial vehicles (vans) and mostly to businesses (in the UK and Spain). The company emerges from a difficult 2008/2009 period when it was forced to raise new equity and then to rationalize its operations.

As of Nov. 25, 2012, the shares trade on the London Stock Exchange, symbol NTG, for approximately ₤2.6 each. The multiples are:

EV*/EBITDA**

EV/FCF

EBIT/EV

P/E

x2.65

x5.7

12.20%

x8.8

* Net debt amounting to ₤418.5 million (₤385.3 excluding operating leases) and diluted shares as of April 2012 (136.31 million) have been considered for the calculation of market capitalization and EV.
** EBITDA (EBIT + Depreciation + Amortization), EBIT (operating profit after exceptional expenses) and FCF (operating cash flow, after vehicle sales and purchases less other investments) are calculated based on April 2012 results.

Northgate operates a profitable and strong cash flow-generating business and as the largest independent player in the UK and in Spain, could make an attractive acquisition for one of the majors. As a general trend the industry is consolidating, and it witnessed a wave of acquisitions during 2011.

Also (with debt going down) at least the current difference between the enterprise value of ₤773 million and the market capitalization of approximately ₤350 million shall be recaptured by the share price which could (maybe in three years) orbit the ₤5.5 range. In the meantime the company may reinstate the tradition of paying sensible dividends. The first dividend since 2008 was declared in June this year at ₤0.03 per share.

The company faces various "outside" risks related to matters such as competition, residual values, health of the economy or exchange rates and risks which are more company specific such as the debt load or the covenants (among others). The rationality proven by this management team since they took the helm in 2009 (fiscal 2010) provides some comfort with regard to their ability to handle the risks, increase the profitability and produce lively operating cash flows.

Revenue growth seems to be another priority on the management's agenda. Nonetheless, the strengthening of the sales team (up 25%) and the recent recruitment of a new sales manager (UK) are actions still to be proven as bearing fruit for the company.

The Investment Thesis

1 - Northgate trades below private market value while it offers a sensible foothold in the UK and Spain – two countries in which some of the major players enjoy either glorious or (surprisingly) inglorious market positions (more details later in the document).

As a general trend the industry is undergoing a process of consolidation with some deals completed in 2011 (Avis/Avis Europe, Hertz/Donlen, Avis/Apex, Alphabet/ING Fleet, ARI/Fleet Support) or undergoing (Hertz/Dollar Thrifty).

It appears that there is a gap between the current trading multiples of Northgate and the multiples paid by CAR for Avis Europe or to be paid by HTZ for DTG.

- Sensible enhancement of the UK and Spanish market positions. Northgate is the largest independent player in the UK and probably in Spain, too (details later in the document).
- A portfolio of more than 4,000 customers, a network of 62 locations in the UK, 23 in Spain
- An EBIT/EV yield of 9.8% (at an acquisition price of ₤4/share)
- A respectable stream of free cash flow FCF/EV yield of 14.1% (at ₤4 per share) and profits with room for improvement if, for instance, cost of debt is reduced from the current 7.1% achieved on average by NTG
- A little extra on the side – the ”Van Monster” retail sales network which operates eight locations in the UK and five in Spain

If those assets are as attractive as I think they are, especially given:

- The consolidation trend
- The inglorious market positions of some major players in UK and Spain
… then maybe Northgate is worth more than ₤2.6 per share and maybe a multiple of 3.5 to 4 times EBITDA (£600 million to £746 million equity value), meaning ₤4.5 to ₤5.5 per share would be closer to fair value and would provide a premium of 69% to 110% to the current market price.

Rumor: In October 2012 the Times printed that Avis might be offering to buy Northgate for ₤4 per share (a 54% premium to the current price). That would value the company at approximately £545 million market cap, or approximately 13.5 times earnings, or 3.31 times EV/EBITDA (as of April 2012).

2. - On a stand alone basis, equity value shall grow with debt reduction (scheduled bank repayments of £68 million or approximately 16% of total finance obligations are due as soon as November 2012), or better if fundamentals improve further:

The current enterprise value is about ₤773 million of which net debt plus leasing is ₤418.5 million. During 2008 to 2012 Northgate produced on average ₤115 million of free cash flow and ₤322 million of EBITDA:
_______________________

- Enterprise value of the company remains ₤773 million
- EBITDA is ₤291 million
- FCF is ₤136 million annually
- Outstanding shares will be 138.6 (versus 136.3 April 2012)
- And debt is fully paid back

Then the equity of Northgate would be valued around the rather not expensive multiples of:

The analysis below tries to evaluate the performance of the business and the risks.

Review of the Business

Following nine years of consecutive growth, Northgate’s fleet peaked at 131,350 vehicles in 2008 of which the UK had 68,600 and Spain had 62,750. The tide has turned, fostered by a radical drop in residual values (“Used car auction prices fell by ₤1,000 per unit in the second half of 2008,” according to BCA – European Used Car Market Report).

During summer 2009 (fiscal 2010) the company had to defer the testing of covenants, raise new equity (₤108 million) and agree to new lending facilities (£880 million, which became effective, upon the receipt of the equity raising proceeds). During fiscal 2010 the CFO who had joined in 2008 became CEO, a new chairman was appointed, as well as a new CEO and a new CFO in Spain. This management team (whose compensation is currently linked to ROCE and EPS, in 2011 CEO’s compensation was linked to ROCE and net debt levels) barred a strategy that promoted “market share first” and promoted a new one which could be summarized by a “leaner but fitter” slogan.

Deleveraging, positive free cash flow generation and the improvement of the bottom line (and ROCE) have been achieved via:

- The organizational restructuring of the company, by consolidation of 20 operating companies in the UK and two in Spain, accompanied by putting all the services under one brand, implementation of company-wide ERP and centralization of customer service
- The fleet size decreasing by 44% during 2008 to 2012 but the rental revenues decreasing only by 15%, with EBIT decreasing by 25% (but growing each year during 2010 to 2012 and getting close to the 2008 level if exceptional expenses lose recurrence) and FCF increasing to ₤136 million from negative ₤1.1 million
- Management of the assets that achieved 88% to 90% utilization of the vehicles (by selling excess vehicles and better management of the fleet). By comparison Dollar Thrifty, for instance, affirms vehicle utilization of 80% to 83%
- Obtaining a certain diversification away (mainly Spain) from customers operating in construction industry by increases in wholesale and retail distribution, and electrical, plumbing and equipment maintenance service sectors (in April 2012 the construction had a weight of 34% of vehicles on hire as compared to 37% in 2011 and 55% in 2010);
- Closing down some locations in both the UK and Spain;
- Reducing the number of personnel to 2,918 from 3,402 in 2009.

The turnaround is illustrated by the numbers below:

Year

Vehicles

Rent Revenues

Average annual rent per vehicle

Net Debt

FCF

EBIT

pcs

₤m

₤/year/veh

₤m

₤m

₤m

2012

91,300

504

5,710

385

136

94

2011

104,700

537

5,566

529

95

83

2010

109,800

564

5,374

615

182

71

2009

123,300

610

5,320

936

163

(118)

2008

131,350

578

5,108

894

(1)

118

2007

120,300

526

5,058

755

(37)

107

2006

111,000

373

4,535

524

4

73

TREV = total revenues, rent revenues + revenues from disposal of used vehicles (for 2006, 2007 the income statement did not include them so I plugged in the amounts corresponding to sales of vehicles from the cash flow statement)
AARPV = average annual rent per vehicle, calculated by dividing rent revenues of the year by average fleet for the year ((beginning balance + closing balance)/2 x 0.9 to adjust for vehicle utilization)
FCF = free cash flow: operating cash flow (after vehicle sales and purchases) less other investments
WC = working capital (current assets less cash - current liabilities less short-term debt)

These good feats are accompanied by:

• Allowance for doubtful receivables still large at (₤20.4)m versus (₤22.2)m in April 2011 and (₤17.08)m in April 2010. Bad debt at (₤3.2)m versus (₤4.3)m in April 2011 and (₤10.3)m in April 2010. Net impairment of receivables at (₤4.9)m versus (₤5.46)m in April 2011 and (₤12.07)m in April 2010
• Dilutive potential of various performance schemes may go up to 10% (momentarily 2.3%) of the shares. The CEO is remunerated with ₤375,000 in basic salary plus ₤96,000 in pension but can make ₤1 million (including cash, deferred shares, performance shares bonuses) if certain performance targets are achieved. Starting 2013 the CFO is remunerated with ₤200,000 in basic salary plus ₤56,000 in pension but can make ₤520,000 if certain performance targets are achieved. Employees can participate in a share scheme where they receive one share free for one purchased.
• Higher administrative expenses ₤60.6 million (April 2012) versus ₤56.8 million (April 2011)
• Decrease of rental rates in Spain by 2% during April 2012 to September 2012
• Covenants could still turn sour if the business experiences temporary setbacks:
“- Interest cover at April 30, 2012, was 2.4x (2011: 2.1x) with EBIT headroom, all else being equal, of £17 million
- Minimum tangible net worth: Headroom at April 30, 2012, was £99 million (2011: £85 million).
- Loan to value at April 30, 2012, was 53% (2011: 63%) giving net debt headroom, all else being equal, of £132 million.
- Debt leverage cover at April 30, 2012, was 1.3x (2011: 1.7x) with EBITDA headroom, all else being equal, of £97 million” (AR 2012).

The company will pay down ₤68 million of debt in November 2012 which shall deliver a bit more headroom for these covenants. The fact they declared a small dividend (₤0.03 per share) in June 2012 must show some confidence (rather than lack of rationality)

• A reduction in the fleet size which may influence the bargaining position with car manufacturers
• The defined contribution pension scheme currently shows a small surplus but was negative during 2008 to 2009

Main Risks

Decline in Rental Prices

In the UK the British Vehicle Rental and Leasing Association (BVRLA) published a member directory 2013 which contains information (not very exact but still meaningful) with regard to the fleet sizes of its members as well as the market segments in which they operate.

UK

The table below presents the total fleet size for each player that operates more than 3,000 vehicles, and their manner of approaching the light commercial vehicles segment (vans up to 3.5 tones). Figure “1” (in the table's cells) means that they are active in that sub segment:

There are about 500 members of BVRLA operating 2.5 million vehicles (which I assume to be the total market):

(i) - The top five players (fleet of more than 100,000) control 52% of the market and are owned by major multinationals (notwithstanding a telecom company and a charity). None of them seems interested in the R (rent) segment (where Northgate conducts substantially all of their business) but in the more secure long-term L (leasing) and FM (fleet management) segments. Should any of them (or a few) move towards the R segment, then a decline in the rental prices may follow. On the other hand, rather than distorting the market they may look around for acquisitions (or if one distorts the market by lower prices, others may defend through acquisitions) and Northgate qualifies as a target.

(ii) - The bottom 15 players in the table (fleets between 3,000 to 20,000 vehicles) plus 459 others (which operate fleets of less than 3,000 vehicles) control about 22% market share (by fleet size). This cohort shall pose a lesser threat since if they act towards lowering rental prices they might be hurt harder themselves.

(iii) - The middle segment consists of 20 companies which operate fleets larger than 20,000 vehicles but lower than 100,000. Northgate, topped by five players in this group, ranks 11th in the total table (notwithstanding the Spanish fleet) (but I am inclined to think that they actually belong higher — the BVRLA data on fleet sizes seems a bit outdated and larger than actual. Northgate for instance was listed with 75,771 vehicles, although they only have 52,900). Interestingly GE, Avis and Hertz rank lower than 14th position. All of the players larger than Northgate (other than Arthur Clarke which combines car trading with fleet activities) are owned by multinationals. Unless I am wrong, as a general rule multinational companies are less inclined to lower prices to gain market share (but rather grow through acquisitions). The logic presented above under (ii) stands for the players in this group which are smaller than Northgate.

According to Northgate’s annual reports the hire rate increase in 2012 was 4% (added to 4% increase in 2011), but some customers moved to smaller vehicles. So, due to the mix influence the average hire revenue per vehicle increased by only 3% in the UK. In the Interim Management Statement (September 2012) the management reveals that “Hire revenue per rented vehicle has remained stable since the beginning of the financial year.”

Conclusion UK: All in all the risk of decline in rental prices stands, but it is rather a “business as usual” risk than something imminent, posing a threat to Northgate specifically.

Spain

In June 2011, Fleet Europe (a good quality publication) provided an overview of the industry throughout Europe from which I harvested some data to construct the table below:

Fleets Spain (+ UK and Global, FYI)

Vehicles

Spain

UK

Global

Leaseplan

85,875

134,718

1,293,000

Arval

80,019

84,558

667,000

Ald

57,125

59,710

848,000

Northgate*

38,400

52,900

91,300

ING**

29,613

49,766

240,000

RCI Banque

10,917

13,422

489,000

Peugeot

10,243

9,500

185,000

Alphabet

7,868

43,947

301,000

Athlon

4,700

-

212,300

Citroen

1,828

21,918

178,000

Sixt

-

9,500

119,700

GE(Europe only)

-

-

245,000

Daimler

2,400,000

Total

326,588

479,939

7,269,300

Source: Fleet Europe, June 2011, No 54

* from the Annual Report 2012

** purchased by Alphabet in 2011

Northgate appears to be the fourth-largest player in Spain. I take this as a ballpark ranking, not a bullet proof one. Even if the table above misses some smaller players, Northgate seems to command 8.6% of total market by fleet-size. According to the Spanish Association of Car Renting (www.ae-renting.es), the vehicle renting market encompassed approximately 445,000 vehicles in October 2012 and its 23 members represent around 99% of it.

The arguments and conclusion for thr UK above shall stand for Spain, too. But the market is more difficult currently, and Northgate has already experienced a decline of 2% in rental prices during April 2012 to September 2012 (latest Interim Management Statement).

Withstand Decline in Used Vehicle Prices?

The Arval used car market index printed in no 58, page 14 (June 2012) of Fleet Europe shows that after experiencing a large decline in second half 2008 and first half 2009 the used car prices rebounded but they are still below the pre-crisis level. What happens next? I think that venturing an opinion on the matter is as simple as stating the future range for S&P 500. However, owing to the same no 58 of Fleet Europe’s marathon interview with the CEOs of (mostly) top European players we can learn their opinions on the big picture:

Question: What about the residual values?

CEOs’ answers:

Ald - quite uncertain, to be monitored closely, but no crisis expected
Arval- not expected to recover pre-crisis levels
Alphabet- seem to have stabilized since 2010
Athlon- the past two years showed that risk reward needs to be included in the leasing price
Daimler - stable with a trend to increase
Sixth- recovering but not to pre-crisis levels
FGA Capital- due to commercial policies on new vehicles RV could be under pressure (he must mean cheap new cars)
Business Lease- pressure on vehicles that are less fuel efficient
KBC Autolease- residual values stabilized

So, except contrarian Daimler ("stable with a trend to increase") people seem cautions (rather than straight pessimistic). Predictions are difficult since the materiality lies with supply and demand (market prices).

Back to Northgate. The chairman and the CEO feels more of the same as above about 2008/2009 (dreadful) but refers to 2010 through 2012 as "strong used vehicle markets in both UK and Spain" (the annual reports NTG publishes include the number of vehicles sold and purchased, as well as the total values, and there are also the lines in the cash flow statements that state the amounts paid to purchase and dispose of vehicles, so more raw data is available for the investors’ analysis).

In the annual report the company also states that “Higher margin retail and semi retail channels accounted for 19% (2011: 22%) of disposals.”

They did not say the precise percentage of the retail sales handled through the ”Van Monster” retail sales network (eight locations in the UK and five in Spain). The annul report did not say if "Van Monster" itself is profitable.

Conclusion - The risk of decline in used vehicle prices stands but it is rather a “business as usual” risk than something imminent, posing a threat to Northgate specifically. However, given the covenants and the fact that last time it had to raise equity the risk of decline in used vehicle prices is the most significant for Northgate. Further reducing debt (₤68 million scheduled in November 2012) might bring some release to the matter.

This link provides useful info with regard to average age and prices for LCV’s auctioned in the UK:

Liquidity (demand) in the used car markets depends on factors such as: used vehicle finance, car manufacturer programs and scrappage schemes (“introduced in many EU countries to kick start sales of new cars in badly depressed new car markets” source: European-Used-Car-Market-Report-2012). The quoted report provides more details to investors at this link: http://www.buckingham.ac.uk/wp-content/uploads/2010/11/pnc-European-Used-Car-Market-Report-2012.pdf, produced by the University of Buckingham Business School.

The differences between the new/used car markets are obvious and the notable facts are:

- The used car markets are more resilient to recession
- They are quite liquid in the UK
- But less liquid in Spain – which is still liquid enough though considering that:
- During 2008-2009, in lower volume markets than the average, Northgate has been able to dispose of close to 14,000 cars per year.
- During 2010-2011 the company disposed of more than 19,000 cars per year (1.2% of average trading volume of the entire market).

Also, Northgate’s ”Van Monster” retail sales network (eight locations in the UK and five in Spain) might be useful for adding to the liquidity of its “for sale” fleet.

Other Factors Affecting Prices and Liquidity:

Obsolescence

The company does not run a significant obsolescence risk since it operates a rather diversified portfolio:

The table below presents the average fleet age as presented by the annual reports.
________________________________
Year....................years old
________________________________

2012....................1.79

2011....................1.94

2010....................1.97

2009....................1.82

2008....................1.45
_________________________________
The company does not run a significant fleet-age risk since on average the vehicles are less than two years old, which compares with the 3.75-year average age of fleet and lease vans at auction in October 2012. This link provides useful info with regard to average age and prices for LCV’s auctioned in the UK:

According to Leasing Life: “The average used LCV price at auction in the UK hit £4,447 in October, up 5.2% month-on-month and 3.3% year-on-year, and just shy of the two-year high of £4,483 reached in January this year, according to the latest report by British Car Auctions. Although values were up in all sectors, ex-fleet and lease values hit a record high of £5,201, up 3.2% month-on-month and 1.7% year-on-year. Retained value against Manufacturer Recommended Price was up by a point on September to 32.6%. The October average age of fleet and lease vans at auction was 45.24 months; average mileage was 72,352, and sale against CAP Clean was 101.52%)." Source: http://www.vrl-financial-news.com/asset-finance/leasing-life/issues/ll-2012/ll-230-nov-2012/fleet-friday-jobs,-money-and.aspx

Maintenance Regime

The company claims to have “improved vehicle maintenance regime.” Improved IT capability and systems should allow greater visibility and planning of the company’s 53 workshops (April 2011).

Downsizing the Fleet Might Affect Discounts from Manufacturers

During 2009 to 2012, Northgate purchased on average 29,725 vehicles yearly, about 30% of each years’ fleet. The average purchase price was ₤10,774 per vehicle (value of vehicle purchases as stated in the cash flow statement/number of purchased cars).

Considering the mix (by make) of the fleet described above as a proxy for the purchasing patterns the company buys yearly close to 5,000 cars from three manufacturers (Mercedes, VW, Peugeot), close to 11,000 cars from one manufacturer and about 3,500 cars from a few other manufacturers. Northgate is not a “whale” like Leaseplan, GE, etc., but it fares better than more than 400 smaller companies in the UK while it is most probably the fourth-largest fleet operator in Spain. The fleet focusing on light commercial vehicles might provide a slightly higher relative weight than apparent at the first sight in manufacturers rankings of buyers of such vehicles.

As a matter of mapping the average purchase price of ₤10,774 per vehicle realized by NTG during the last five years compares to the following (current) retail prices:

starts from

_______________________________________

₤

Ford Transit Connect

10,260

Ford Transit Van

17,995

Mercedes Vito

17,680

Mercedes Sprinter

20,620

VW Caddy

12,860

VW Transporter

16,960

VW Crafter

20,800

Source: websites of LCV manufacturers, November 2012

Unless the fleet size falls dramatically, which appears not to be the case anymore, odds are that Northgate will not be disrupted by suddenly decreasing discounts but will stay more or less in the range of its current “discount brackets,” probably faring better than a lot many smaller competitors and worse than the majors.

The Risk of Increased Cost of Debt

The current average cost of debt is 7.1%. If covenants are breached additional costs may occur. The company is embarked on a deleveraging program (next tranche of £68 million to be paid back in Nov 2012) which will contribute to mitigate this risk.

Risk of Irrational Management

This management team acted rationally during 2009 to 2012 and has recent memories of difficult times. Odds seem higher for ration to persist (no extravagant ideas like empire building for instance are signaled by the current “leaner but fitter” behavior).

Depreciation Policy

Depreciation can be (to a large extend) subjectively determined by management based on their estimates of residual values for vehicles to be disposed (the higher the estimates, the lower the depreciation, hence the more improvement to the bottom line, EPS, bonuses).

A comparison of the ratio between depreciation and rent revenues for Northgate (NTG) and a few other industry players is presented below:

Depreciation/Rent Revenues

% of rental

Date

CAR

32%

31.12.2011

DTG

21%

31.12.2011

HTZ

22%

31.12.2011

NTG

38%

30.04.2012

Lesedrive

39%

31.12.2011

Sixsth

21%

31.12.201

Northgate’s management seems more conservative than the SIxth, CAR and HTZ colleagues, but Sixth, HTZ and CAR have in place agreements requiring automobile manufacturers to repurchase used vehicles or guarantee their depreciation rate, so they are not directly comparable.

DTG has little such programs in places and trades the used vehicles on its own. They claim to keep vehicles in rental service for approximately 18 to 22 months which also compares better with Northgate’s latest average of 21.5 months. Northgate’s management is more conservative than DTG’s with a depreciation to rent ratio of 38.3% versus DTG 21.4%.

Leasedrive (“LDR” in the table above), the MBO backed by Lloyds Capital, makes its annual report public, and its depreciation to rent ratio is 38.6%.

For Northgate, depreciation expense (April 2012) represented 38.3% of rent revenue. This compares with 40.2% (April 2011) and 40.8% (April 2010) and 36.5% to 37.5% during 2006 to 2008). Given the "Strong used vehicle markets in both the UK and Spain," the decrease of 2.1% in depreciation between 2011 to 2012 does not look like manipulation to improve the bottom line but a “business as usual” type of adjustment.

Foreign Exchange Risk

Spain produces 35% of Northgate’s revenues and about 33% of the group’s EBIT in euros. In addition, 250 million of long term debt is denominated in U.S. dollars. The company uses cross-currency swaps but if the catastrophic scenario happens (euro related), then the turmoil may affect the covenants. This deserves a bit more investigation on your part.

A Review of the Growth Opportunities

Rent Revenues

There is little factual indication yet that rental revenues will grow unless the UK and Spain’s economies grow as well. The rental rates have been increased during 2011 and 2012. But this year the UK remained stable (April through September 2012) and in Spain rates have been decreased by 2% — still not an enticing environment. On the other hand, management seems to believe there are hopes for organic growth in the UK and acted towards it, given these public announcements:

Nov. 12, Jon Tobbell joins as the National Sales and Marketing Director. He apparently achieved 50% revenue increase in his former role at Hermes UK. He “hopes to achieve comparable results for Northgate” (Hermes UK is part of the European group Hermes Logistics Group approximately EUR 1.8 bn turnover last year, which is owned by German mail order and catalogue retail major Otto Group).

Northgate’s product addressed to the retail market (vans for personal use) was, at Oct. 31, 2012, on track to double (to £4.4 million) as compared to last year.

May, June 2012, company announces 25% increase in its sales force and promotion of new head of national sales (probably replaced in November 2012?).

New supply chain and business development director and new area sales manager northeast have been appointed.

We shall see if the organic growth hopes acted upon by the management through strengthening the team (as described above) will materialize.

The UK market is quite fragmented with +500 players. The top 41 players deliver about 2.14 million vehicles to the market while small fleets of less than 3,000 vehicles each provide at least 450,000 vehicles to the market. According to the latest management release the new sales team will focus on both national and regional level in order to increase penetration/market share and they seem to feel that Northgate might enjoy some competitive advantages as compared to its smaller competitors. What they say makes sense, the reality test will follow during the next 6 months.
Disposal Revenues

The company seems to be doing the right things (fleet mix, fleet age, maintenance) which is good. Materiality is with supply and demand so except offering proper vehicles, there is not much else they can do.

EBIT

Shall improve assuming that:

- The savings in staff costs resulting from the decrease in the number of personnel will be preserved. That represented an economy of ₤1.6 million (April 2012) versus April 2011. Given 25% increase in sales agents at least some of this economy will go away.

- The exceptional administrative expenses such as restructuring costs 2012 - £7 million, 2011 – £5.6illion, will disappear. The net impairment of receivables expensed in COGS was also eating out of EBIT £4.9 million in 2012, and £5.5 million in 2011.

Should these phenomena diminish in significance, as they are expected to, EBIT will grow even if revenues are stagnant or slightly decreasing.

Profit Before Tax

Interest costs are substantial currently. Paying back £68 million of U.S. loan notes (8.8% interest) in November 2012 will lower the interest expense by £5.9 million for next year. If all of the above mentioned expenses disappear PBT could grow by £19.4 million.

There are also some exceptional financial expenses which amounted to £3 million at April 2012 (versus £4.2 million in 2011, £15.2 million in 2010 and £33.8 million in 2009) and last year included mainly extinguishment of debt fees and termination of swaps related expenses. These kind of expenses will most probably be recurring, but hopefully they will continue to diminish.

Net Profit

Grows with the above, but regular taxes will start to be paid, too, in 2013. A deferred tax asset which amounted to £17.2 million in 2009 has already been consumed to a large extend.

A Review of Nortgate's Ranking Within the Industry

Northgate is the largest independent fleet rental company in the UK although in appearance, Arnold Clark is larger (BVRLA table). Arnold Clark is mainly a dealer of vehicles which achieved £2.2 billion turnover in December 2010. Of this turnover only £155 million (and pretax profit £8 million) was generated by their vehicle management and daily rental business.

The next large independent (about 35,000 vehicles in the UK) is Leasedrive, the MBO backed by Lloyds Capital, which generated £104 million in turnover and £4.87 million EBIT in 2011.

As such, Northgate is the largest independent in the UK. It operates a profitable and sizable business in Spain, too. These feats make it more attractive than its competitors as an acquisition target for a strategic player interested in buying scale (market share, cash and profits).

GE, Avis and Hertz are each smaller than Northgate in the UK (and much smaller than the European majors) and probably in Spain, too.

Soon enough (with debt going down) the strong FCF generated by the company may also entice the interest of private equity firms.

Question: Does the company disclose the current composition of the fleet?

Net PP&E stands at 800m or so - about the same as Enterprise Value. It seems to me investors are buying some 90,000 vans at roughly 8,900 apiece. This seems reasonable to me to me but not absurdly cheap (unless they are all MB or VW).

With the fleet shrinking, they have been selling old vans faster than they are buying new ones. I find it fascinating that they are collecting 160m in cash from the sale of (my rough estimate) 40 000 vehicles per annum. That works out to 4.000 per vehicle sold. I should hope those are old Vauxhalls they're selling and not Sprinters. I may be wrong on these numbers; correct me if I am.

I thought that their fleet is not that old age (My car is 19 years old... but it was not the yardstick (-:).See below the data from British Auctions _:7055:http://www.british-car-auctions.co.uk/About-Us/Latest-News/7-November-2012---BCA-Commercial-Pulse/:/7055:.

They also have good brands in their fleet.

Fleet/Lease

Avg Age

Avg Mileage

Avg Value

Sale vs CAP

Oct 2011

44.27

71,021

£5,111

103.62%

Oct 2012

45.24

72,352

£5,201

101.52%

I look forward to see how much of the debt was paid back during April - Nov. 2012. It comes out in a few days.

Negative:- rent revenues down by £61m;- average hire revenue per rented vehicle has decreased by 1% since the beginning of the financial year.Positive:- Debt decreased by £110m (on 20 November 2012);- improved bad debt levels (Spain) - charge in the period of €0.2m, compared to a charge of €2.7m in the same period last year;- improved DOS days (Spain) to 66 days from 72 previously- Interest costs lowered by £3.1m as a result of lower average net debt;- tangible net asset value of 273.6p per share (April 2012 - 264.9p per share).

The key challenge remains stabilization and growth of rent revenues. They have done a good job on costs with operating profit decreasing by only £8.4m despite rent revenues down by £61m.

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